The Labor Market in China, 1989-2009

[In the U.S.] cohort effects persist for over a decade, [but] in China cohort effects associated with the supply/demand balance diminished within three years.

Buffeted by dramatic structural and economic changes in its demand for labor over the past two decades, China's workforce has adjusted in ways often seen in advanced economies. However, according to Wei Chi, Richard Freeman, and Hongbin Li writing in Adjusting to Really Big Changes: The Labor Market in China, 1989-2009 (NBER Working Paper No. 17721), China's labor market has shown a marked difference: cohorts who enter the workforce at favorable or unfavorable times see their wages and occupational position revert to the average much more rapidly than in most Western economies.

This study suggests that three factors are behind this enhanced flexibility: 1) rapid economic growth; 2) high employee turnover; and 3) the weakness of China's internal labor markets. "The Chinese labor market has responded about as well as one could expect to the changes in the demand and supply factors and institutional shocks in this critical period in Chinese economic history," write the authors.

China has accomplished a dramatic transformation in less than three decades. Until the 1980s, it had no real labor market. State-owned enterprises were the only employers; government agencies assigned workers to jobs. But starting with agriculture and product markets, the government began to loosen the reins of control. Firms began to decide how many workers they needed. Workers got to choose for whom they worked. Labor began to adjust to changes in demand and supply as China's urban economy grew rapidly.

By focusing on the period 1989-2009, the authors find that this liberalization had three major effects: 1) Wage differentials widened --the pay gap between better- and less-educated workers increased and then stabilized. Through 1990, the premium for more experienced workers shrank. Then it grew massively, especially for older workers whose pay had been limited in the pre-reform era. The more experience workers had, the more likely they were to have white collar jobs. 2) Young workers saw wages and job opportunities vary depending on the state of the economy when they started looking for work. 3) The size of the cohort entering the workforce had a direct impact on wages: larger cohorts reduced wages. Rising gross domestic product increased wages and wage inequality. Between 1989 and 2008, the inequality in earnings more than tripled, then fell back somewhat in 2009.

All of this may sound familiar. "Overall, the adjustments in China to changes in supply and demand are similar to those in the US (which faced more modest market pressures)," the authors write. Only in the persistence of cohort differentials did the two vary in a substantial way. "Whereas in those countries [like the US and other advanced economies] cohort effects persist for over a decade, in China cohort effects associated with the supply/demand balance diminished within three years."

For example, the authors found that if a particularly large class of Chinese graduating from college depressed starting salaries by 10 percent from the predicted trend, the students' wages would grow faster than expected - about 12 to 14 percent - over the next three to five years, allowing them to catch up. The same was true for those forced to take less desirable positions. Within three to four years, they typically were able to get jobs on a par with those of earlier cohorts at the same stage in their careers.

-- Laurent Belsie

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